CHAPTER 7
REGIONAL ECONOMIC INTEGRATION
Case: Ford in Europe
One of the most notable trends in the global economy in recent
years has been the accelerated movement toward regional economic
integration
Regional Economic Integration: agreements between groups of countries
in a geographic region to reduce, and ultimately remove, tariff
and nontariff barriers to the free flow of goods, services, and
factors of production between each other.
By entering into regional agreements groups of countries aim to
reduce trade barriers more rapidly than can be achieved under
the auspices of the WTO
The specter of the EU and NAFTA turning into ëconomic fortress"that
shut out foreign producers with high tariff barriers is particularly
worrisome to those who believe in the value of unrestricted free
trade
I - LEVELS OF ECONOMIC INTEGRATION
Free Trade Area: In a free trade area all barriers to the trade
of goods and services among member countries are removed. In the
theoretically ideal free trade area, no discriminatory tariffs,
quotas, subsidies, or administrative impediments are allowed to
determine its own trade policies with regard to nonmembers.
Ex: EFTA and NAFTA
Customs Union: eliminates trade barriers between member-countries
and adopts a common external trade policy.
Ex: Andean Pact
Common Market: The theoretically ideal common market has no barriers
to trade between member-countries and a common external trade
policy. Unlike in a customs union, in a common market factors
of production also are allowed to move freely between member-countries.
Thus, labour and capital are free to move, as there are no restrictions
on immigration, emigration, or cross-border flows of capital between
member-countries.
Economic Union: An Economic Union involves the free flow of products
and factors of production between member-countries and the adoption
of a common external trade policy. A full economic union also
requires a common currency, harmonization of the member-countries
tax rates and a common monetary and fiscal policy.
II - THE CASE FOR REGIONAL INTEGRATION
A - THE ECONOMIC CASE FOR INTEGRATION
Unrestricted free trade will allow countries to specialize in
the production of goods and services that they can produce most
efficiently
Asian, Russian, and Latin American Crisis: Questioning liberalization
of financial markets!!!
Opening a country to free trade stimulates economic growth in
the country, which in turn creates dynamic gains from trade.
Flows of FDI can transfer technological, marketing and managerial
know-how to host nations.
Stimulates Economic Growth
B - POLITICAL CASE FOR INTEGRATION
Incentives are created or political cooperation between neighboring
states
By grouping their economies together, the countries can enhance
their political weight in the world.
C - IMPEDIMENTS TO INTEGRATION
Costs, painful adjustments
Concerns over national sovereignty
III - THE CASE FOR/AGAINST REGIONAL INTEGRATION
A - TRADE CREATION
Occurs when high-cost domestic producers are replaced by low-cost
external suppliers within the free trade area.
B - TRADE DIVERSION
Occurs when lower-cost external suppliers are replaced by higher-cost
suppliers within the free trade area.
A regional free trade agreement will benefit the wold only if
the amount of trade exceeds the amount it diverts.
In theory, GATT and WTO rules should ensure that a free trade
agreement does not result in trade diversion.
IV - REGIONAL ECONOMIC INTEGRATION IN EUROPE
The EU is the product of two political factors:
a) Devastation of two wars
b) Desire to hold their own on the world's political and economic
stage
TREATY OF ROME - 1957
In 1973, first enlargement of the EC
Other additions, Greece in 1981, Spain and Portugal in 1986, and
in
1996 by Finland, Austria and Sweden
With a population of 350 million and a GDP greater than that of
the United States, these enlargements made the EU a potential
global superpower.
In 1994, following the ratification of the Maastricht treaty
Single European Act: The main problem with the EC was the disharmony
of the member-countries technical, legal, regulatory and tax standards.
The rules of the game differed substantially from country to country,
which stalled the creation of a true single internal market.
The "White Paper" was published in 1985, proposing that
all impediments to the formation of a single market be eliminated
by 1992.
Objectives of the Act: frontier controls, mutual recognition of
standards, public procurement, financial markets, lifting barriers,
exchange controls, freight transport.
"The United States of Europe"
The Treaty of Maastricht
Common currency, lower cost of doing business in Europe, reduce
risks that arise from currency fluctuations.
National authorities would lose control over monetary policy
Enlargement of the European Union: Eastern European Countries?
Fortress Europe?
V - REGIONAL ECONOMIC INTEGRATION IN THE AMERICAS
A - The Nafta Agreement
Nafta became law January 1, 1994.
Guidelines:
- Abolition within 10 years of tarifs on 99% of the goods traded
among Mexico, Canada, and the U.S.
- Remove most of the barriers on the cross-border flow of services
- Protect intellectual property rights
- Removes most restrictions on FDI among the three members
- Members are allowed to apply its own environmental standards
Arguments against NAFTA:
- mass exodus of jobs from the US and Canda (Perot's "Sucking
Sound")
- Expose Mexican firms to highly efficient Canadian and American
firms.
- Painful Economic Restructuring and Unemployment in Mexico
- Loss of National Sovereignty
B - FTAA
Enlargement of NAFTA or the creation of two major trading blocks
in the Americas SAFTA and NAFTA?